Bronx Real Estate Blues

In the Bronx private equity groups such as SG2, and Pinnacle have been speculating on rent stabilized buildings. The concern on this issue has been the potential for owners to cut back on services to buildings in order to handle their huge debt service (mortgage) payments and rising operating costs (e.g., fuel, water, insurance). The worst case scenario involves a building going into foreclosure -- a losing situation all around not just for the owner, investor and lender, but more importantly for the building, the tenants and the neighborhood. As we saw in the late 1980s with the rash of multifamily foreclosures in Bronx buildings overfinanced by Freddie Mac, these properties often fell into serious disrepair and communities. The owners of the Riverton, a large middle income and mostly rent stabilized housing complex in Harlem, are warning their lenders that "they are in imminent danger of defaulting on their mortgage." While a number of small Bronx apartment buildings (6 - 15 units) have already gone into foreclosure in recent years, the Riverton may signal a wave of larger defaults. The recent disclosure that the owners of Riverton Houses, a 1,228-unit apartment complex in Harlem, might default on their loan has shocked the real estate industry. And it has raised fears about other apartment building deals from the not-so-distant past, when the frenzy in the market was reaching its peak. The strategy in these types of investments has been to achieve high levels of turnover in apartments (i.e., force/encourage as many tenants to move out as possible, especially the ones with lower rents) in order to take advantage of rent stabilization laws that allow for a 20% increase in an apartment's rent upon vacancy. That's how you terrorize and kill people, get them out, and make money, but now the mortgages are going south too.